UNIVERSITY OF ILLINOIS LIBRARY 


JUN 14 1915 
A REPORT 


ON 


FIRE INSURANCE RATES 
ENG LELINGIS 


BY 


MAURICE H. ROBINSON, Ph. D. 
_ PROFESSOR OF INDUSTRY AND TRANSPORTATION 
ji UNIVERSITY OF ILLINOIS 


PREPARED FOR THE 


EFFICIENCY AND ECONOMY COMMITTEE 


CREATED UNDER THE AUTHORITY OF THE 
FORTY-EIGHTH GENERAL ASSEMBLY 


STATE OF ILLINOIS 


SENATORS 
WALTER I. MANNY, CHAIRMAN” - MT. STERLING 
W. DUFF PIERCY - - - - MOUNT VERNON 
LOGAN HAY - - - - - - SPRINGFIELD 
CHARLES F. HURBURGH =- - - GALESBURG 
REPRESENTATIVES 
CHARLES F. CLYNE, SECRETARY - - AURORA 
SPEAKER WILLIAM McKINLEY - - CHICAGO 
JOHN M. RAPP - - - - - FAIRFIELD 


EDWARD J. SMEJKAL - . - . CHICAGO 


JOHN A. FAIRLIE, DIREcTOR - ° > URBANA 





INTRODUCTION 


During the investigation by the Efficiency and Economy Com- 
mittee of the administration of the laws for the supervision of cor- 
porations and business under public regulation, and while considering 
plans for the organization of the several State offices and commissions 
dealing with these several matters into a single executive department, 
there arose the question of the powers that the Commissioner should 
be clothed with over insurance companies and the further question as 
to whether the present State laws were adequate. In this general dis- 
cussion many questions arose, among them the question of fire in- 
surance rates. Properly to arrive at a just conclusion, the Committee 
determined to have prepared a general survey of the fire insurance 
business, including the matter of fire insurance rates. The Committee 
did not have funds sufficient to make any extended investigation of 
insurance companies; and it was therefore, suggested that the reports 
of the various State commissions and commissioners of insurance be 
used in the preparation of the paper. In accord with this suggestion, 
the Committee requested Professor Maurice H. Robinson to prepare 
a short history of fire insurance and also a brief report on fire insur- 
ance rates. The study made in accordance with this request and the 
suggestions of the Committee is herewith presented. 


Therefore, this study of Professor Robinson’s is not an exhaustive 
original investigation of the subject. As the Committee had sug- 
gested, he has used the data set forth in the reports made by special 
commissions and State Insurance Commissioners in other states. While 
this report was prepared, some months previous to the report of the 
present Insurance Superintendent of this State, and was founded on 
the reports as suggested, it is in full accord with the special findings 
of Superintendent Potts that fire insurance rates in this State are 
inequitable and excessive; that fire insurance rates are controlled by a 
combination of insurance companies; and that such rates should in 
some way be regulated and controlled by the State. On the question 
of how to deal with insurance companies in the matter of rates there 
is ample room for a just difference of opinion. It should be noted, 
however, that the recommendations in the report herewith appended 
are in direct agreement with the recommendations of the Special Com- 
mittee of State Insurance Commissioners appointed by the Insurance 
Commissioners of the United States’ in their annual convention, of 
which Committee Insurance Commissioner Ekern of Wisconsin was a 
member. 

As a result of its investigations, the Committee decided to limit 
its recommendations to changes in administrative organization under 
existing laws and not to propose changes in the substantive law. This 
determination was reached, not only because of the question as to its 
authority in the latter class of matters, but also because the plans for 
administrative reorganization involved as much as could be carefully 


1004 EFFICIENCY AND ECONOMY COMMITTEE 


considered in time for the Committee to report to the Forty-ninth Gen- — 
eral Assembly. The recommendations in this paper were not in all 
respects concurred in by all the members of the Committee. However, 
they do meet with the approval of some of the members. This report 
is printed and submitted for the valuable information it contains on 
the subject of fire insurance and fire insurance rates. 

WALTER I. MANNY. 


A REPORT ON FIRE INSURANCE: RATES IN ILLINOIS. 
BY PROFESSOR MAURICE H. ROBINSON, UNIVERSITY OF ILLINOIS. 


HISTORICAL DEVELOPMENT. 


Fire Insurance as an important factor in business affairs dates 
from the great fire in London, in 1666, when over eighty-five per cent 
of the buildings in that city were destroyed. The next year, one 
Nicholas Barbon opened an office for the purpose of insuring buildings 
against fire. This venture was so successful that in 1680 the business 
was enlarged and a partnership formed under the name of “The Fire 
Office.” In 1681 an attempt was made to establish a department of 
the city government for the purpose of underwriting risks by the city. 
This project was abandoned after two years experience. The business 
steadily grew in importance, and in 1681, the first of the mutual 
companies was formed and began operations under the name of “The 
Friendly Society,” an organization which lasted for one hundred years. 
Thus it will be noticed that within a period of fifteen years, 1666-1681, 
all the important methods of carrying on fire insurance, viz.—stock, 
state and mutual were operated in London side by side as a direct 
result of the greatest conflagration, relatively speaking, which history 
records. For the first one hundred years after the great fire, the 
growth of fire insurance was slow. Beginning about 1800, the busi- 
ness of insuring buildings against the ravages of fire began to develop 
more rapidly and during the last seventy-five years the growth has 
been both extensive and intensive, until at the present time every civ- 
ilized country has a fairly well developed fire insurance system cover- 
ing a large proportion of the fire risks. 

It is not possible to determine the exact amount of insurance in 
force in the United States at the present time. This results from two 
conditions: (1) Only a part of the insurance actually carried is 
reported to the various: state insurance departments,’ and (2) there 
is nO Organization that makes it a business to collect and publish all the 
insurance actually in force in the several states. 

It is, however, possible to reach an approximation that is fairly 
accurate. Each state published the total amount of the insurance car- 
ried by the several companies authorized to operate within its jurisdic- 
tion. . All of the more important companies operate in the larger states 
and while there are many small companies operating locally, the total 
bulk of such insurance is relatively small. Taking the companies 
reporting to the State of New York, it is found that on December 31, 
1912, such companies had a total of $51,202,402,351 of fire insurance 
in force. To this must be added insurance carried by unauthorized 
companies and by companies operating in other states? but not in New 
York. If we may assume that the companies operating in the State 
of New York carry seventy-five per cent. of the total carried in the 
United States, then the total amount covered by insurance would be 
approximately seventy billion dollars ($70,000,000,000). From these 


1Report of the Commissioner of Insurance, Wis., 1914, p, 15. 
*N, Y, Insurance Report, 1913., pt, 1, p. Ixv, 


1006 EFFICIENCY AND ECONOMY COMMITTEE. 


approximations it would seem that the risks subject to destruction by 
fire are fairly well covered by fire insurance.® 

The reason for the rapid growth of fire insurance during the last 
seventy-five years is not difficult of explanation. The property of 
each individual owner is subject to destruction by fire at any time. 
For the whole United States the annual fire loss has averaged about 
$225,000,000 for the past ten years, and in one of these years, viz., 
1906, the total loss by fire was over $500,000,000. This annual loss 
must be borne by someone. Formerly it was borne by the owner. 
Now most property owners prefer to pay an annual fire insurance tax 
and be relieved from the risk of a partial or total loss. Fire insurance 
is, in fact, a great cooperative institution, all those insured contrib- 
uting to a common fund, and all the insured who suffer fire losses 
drawing out an amount equal in general to their individual losses. The 
annual contribution of each is small in comparison to the individual’s 
income from which it is drawn. A fire loss when it comes is liable 
to represent a substantial portion of the savings of a lifetime. The 
sum of all the contributions is nearly double the actual losses, but so 
much more serious is a total or nearly total loss to any individual 
when considered from the standpoint of his economic well-being than 
a series of comparatively small ones, that society could well afford 
to pay even more than it does now rather than dispense with the pro- 
tection afforded by fire insurance. 

It follows from this that fire insurance rates might be raised con- 
siderably above their present level and still the individual members of 
society would find it to their advantage to carry insurance. Why then 
do not insurance companies raise their rates? : 

There is some competition between the standard fire insurance 
companies. More important, however, is the competition of the 
mutual companies, including town and county mutuals, factory mutu- 
als, the Lloyds and during the past five years the inter-insurers. 

The town and county mutuals are, however, not fitted by nature 
to undertake risks subject to the conflagration hazard. Therefore, 
their competition is substantially limited to country districts and the 
smaller towns. The factory mutuals, the Lloyds and the inter-insurers 
are, on the contrary, admirably fitted to undertake such risks. Con- 
flagrations are unlikely to occur in several cities at the same time. 
The factory mutuals, the Lloyds and the inter-insurers make it their 
policy to scatter ‘their risks and so avoid to a large extent the con- 
flagration hazard. Moreover, by a well-organized system of inspec- 
tion, the factory mutuals and to a somewhat smaller extent, the inter- 
insurers, have so encouraged and perfected the art of fire prevention, 
that their burning ratio has been phenomenally low as compared with 
risks insured in the usual way. As a result, fairly active competition 
has been maintained in many lines of commercial risks, including fac- 
tories, stores, warehouses and the like. Such insurance has not, how- 
ever, been developed to any extent among property owners of other 
classes in the congested districts.. In such cases, competition is gen- 
erally ineffective and the rates are likely to be somewhat above the 
average. 


8See U. S. Geological Survey, Bul, 418, for other estimates, 


FIRE INSURANCE RATES 1007 


METHODS OF CONDUCTING THE FIRE INSURANCE BUSINESS. 


There are three methods of carrying on the business of fire 
insurance : 


The Mutual Plan 
The Stock Company Plan 
State Insurance 


The Mutual Plan 


In the mutual plan of carrying on insurance, a group of risks are 
associated under an agreement, whereby each individual member 
agrees to bear such a portion of any loss that may come to any of the 
risks associated as the insured value of his property bears to the total 
insured value of all risks insured. Generally speaking, each insured 
deposits a certain stipulated premium and guarantées by a note or 
other evidence of his responsibility that he will bear any additional 
assessments that may be made by the proper authorities on account of 
additional losses. The premium deposited is, however, usually larger 
than is necessary to pay the prorated share of the losses and expenses, 
and any surplus is held as a reserve and finally, or at intervals, dis- 
tributed according to the plan adopted at the beginning among the 
insured. In mutual insurance the rates charged are not important. 
The important features are: 


The actual fire losses; 

The expenses of conducting its business ; 

The distribution of the burdens—that is, the share that each 
member finally bears. 


The Stock Company-Plan 


Notwithstanding the advantages of the mutual plan, a very large 
proportion of all fire insurance is conducted by stock companies or 
by individual insurers and partnerships for profit: 


The reasons for this condition are as follows: 


1. The conflagration hazard is directly connected with the 
building of wooden structures closely adjoining one another as in the 
modern city. Under these circumstances it is inevitable that fires 
should spread. Occasionally where the conditions are favorable, con- 
flagrations result. Such was the case in Chicago in 1871; in Boston in 
1872; in Baltimore in 1904 and in San Francisco in 1906. Unless the 
mutual companies are so large as to be unwieldy from the administra- 
tive point of view, or the risks so scattered as to make the expense of 
doing business prohibitory, the losses to the individual policy holder 
are liable to be so heavy in case of conflagrations as to make the insur- 
ance a burden rather than a help. On this account mutual companies 
generally have confined their activities to the country districts, or to 
villages and have left the congested city to the stock companies. : 


2. The object of a mutual company is to save money to the 
insured by reducing the cost of insurance to the actual expenses. 
While it is quite impossible with the information at hand at the pres- 
ent time to make a comparison of any value, it is often stated that the 


1008 EFFICIENCY AND ECONOMY COMMITTEE. 


fire insurance business is not particularly profitable.* 

Certainly more insurance companies have failed during the past 
fifty years than have made financial successes. The mutual rate is gen- 
erally low—due to the following reasons: (1) Much of the work con- 
nected with the administration is not paid for at its commercial value; 
and (2) the mutuality of the insurance tends to reduce the actual fire 
loss, where the insured are closely associated. This is best illustrated 
by the experience of the factory mutuals where the fire loss has been 
reduced by a careful inspection and the dissemination of information 
toa fourth and in some cases to an eighth of the former rate. 

3. The difficulties connected with establishing and maintaining 
efficient administration of mutual companies has proved a marked 
obstacle to their development. This obstacle is growing less each 
year but is still of great importance. 

4. In some states mutual companies are encouraged by appro- 
priate legislation; in others, the state occupies a neutral position; in 
still others, the state government has seemed to discourage the forma- 
tion of mutual companies, and to favor the stock plan. Historically 
speaking, Illinois seems to have adopted the policy of neutrality. It 
seems to the writer that the state ought to change its policy.in this 
respect and adopt that of encouraging the formation and operation 
of mutual companies in all fields of insurance. 

State Insurance , 

As stated in the historical introduction, State Insurance was tried 
in London as early as 1681, but was soon abandoned. . State Insur- 
ance has, however, been fully developed in several of the leading 
European countries, especially in Germany, where the government 
has played a leading part in undertaking industrial activities as well as 
in regulating those owned and operated by private individuals. It is 
in New Zealand, however, that State Insurance has been promoted 
with the greatest vigor. There it has been used as a means of regu- 
lating the rates of the stock insurance companies rather than of secur- 
ing a revenue to the government. As this report was undertaken for 
the purpose of comparing fire insurance rates in Illinois with those in 
other states, where the conditions are somewhat similar, it would be 
inconsistent with its purpose to enter upon a discussion of the relative 
merits of the three plans of carrying on the business of fire insurance.° 

HOW RATES ARE MADE . 
Competitive Rates 

In the earlier history of fire insurance, rates were made by indi- 
vidual fire insurance underwriters, entirely independent of the others 
in the same line. Under such conditions the rates were sharply com- 
petitive and for the larger risks there was active bidding. Sometimes 
the premiums were less than the average cost of the fire losses and 
still the rates were maintained on the same general level. The reason 
for this is evident when one considers the circumstances: 

(1) Any rate above the direct costs of placing the business— 

4The “Spectator” in the issue of June 4, 1914, shows that the losses and under- 
writing expenses of 112 companies for a period of 16 years ending with 1913, exceeded 
the underwriitng income by over $20,000,000. 


5See Gephart, State Insurance (N. Y. 1913), for a full discussion of the merits 
and disadvantages of State Insurance. 


FIRE INSURANCE RATES 1009 


that is, agents’ commissions, etc.—is likely to give a clear profit, as the 
chances are strongly in favor of escaping without any fire, or fire 
losses, during the period of insurance. 

(2) The agents who place the insurance are primarily interested 
in writing insurance for the sake of obtaining commissions, conse- 
quently their influence is in favor of lowering the rate in special cases 
where the business would otherwise go to some other agent. 

(3) Until recent years, there was no statistical information avail- 
able upon which to make a rate based upon the average fire loss. 

As a result of the above conditions, rates tended to be high for the 
small owners, or for those unable to obtain mutual insurance, and low 
for the large owners and those able to form or take advantage of 
mutual companies already in existence. 

Competitive fire insurance rate making thus led to discrimina- 
tions® between risks of essentially the same general character, depen- 
dent upon whether the owners were able to make use of competition 
or not. Thus some rates were excessive and others too low. Such a 
condition was good neither for the companies nor the policy holders. 
Two general movements were inaugurated to correct the evils, one 
started by the policy holders, the other by the companies. We shall 
discuss the plan inaugurated by the companies first. 


Schedule Rating 

Schedule rating is an attempt to measure class hazards and to 
base the general rate on the class hazard. In addition, there is a 
further attempt by a system of credits and demerits to fix the rate on 
each individual risk according as it is better or worse than the class 
to which it belongs. 

The first attempts to work out a system of schedule rating dated 
from the period just following the Civil war. One of these originated 
in Philadelphia, another in St. Louis. Neither of these systems, how- 
ever, was much used. Each proved to be so much more equitable to 
all parties that a general movement was inaugurated under the general 
direction of Mr. F. C. Moore, to prepare a schedule that might be 
used by all the companies. A ‘committee was appointed representing 
the leading fire insurance companies and as a result of their work the 
Mercantile Schedule was formulated and adopted. Since about 1890 
it has been in general use in eastern states and includes some of the 
leading cities in the eastern central states. 

(1) The Mercantile Schedule: This schedule is based upon 
two central ideas: (1) A standard city and a standard building, and 
(2) a system of charges and credits for deviations from the estab- 
lished standard.” The base rate for a standard building in a standard 
city was fixed at twenty-five cents. To obtain the key-rate for a stand- 
ard building in any other city, additions were made on account of 
deficiencies as to water works, fire departments, building laws, narrow 
streets. To the key-rate for any city, charges are added to find: the 
rate for individual buildings on account of deficiencies from the speci- 
fications of a standard building. 

®*Zartman, Discrimination and Co-operation in Fire Insurance, Yale Readings in 


Fire Insurance. 
TMoore, Fire Insurance and How to Build; The Mercantile Schedule. 


1010 EFFICIENCY AND ECONOMY COMMITTEE. 


(2) The Analytical Schedule: Soon after the Mercantile 
Schedule was formulated, Mr. A. F. Dean of Chicago began working 
on a schedule constructed on different lines. In the first place, the 
Dean or Analytical Schedule® classifies cities into six classes—depen- 
dent upon water protection, fire departments, etc.; and in the second 
place, the deductions and additions are on a percentage basis rather than 
a fixed amount. By dividing cities into classes, the work of rating 
individual risks is somewhat simplified; by making the charges on 
account of individual defects or excellences, a percentage of the origi- 
nal base rate, the principle of relativity is adopted, viz., that a defective 
flue in an inflammable home is a greater hazard than an equally defec- 
tive flue in a fire proof building—that is, each added defect makes the 
original defect worse. 

The principle of schedule rating is a sound and equitable one. 
Rate-making thus becomes scientific in character and as the experience 
of the various companies becomes wider and as their records become 
more complete and extensive the schedule rates become more and more 
equitable,—as between different.classes of risks and different individ- 
uals insured. It is evident, however, that schedule rating in itself gives 
no protection against a high level of rates. 

Cooperative Agencies 

With the general adoption of schedule rating it became desirable 
for the companies to cooperate for the purpose of making the basic 
schedules, and having entered into such cooperation it was of course 
natural to observe the rates thus made. For the United States there 
are two important rating associations, the Western Union and the 
Western Insurance Bureau. 

The Western Union was formed soon after the Dean Schedule 
was formulated and embraces the states of the northern portion of the 
Mississippi Valley, west of Pennsylvania, north of Alabama and east 
of Colorado, Wyoming and north to the Canada line. The member- 
ship is made up of officers and agents of -stock companies and it has — 
jurisdiction over rates and commissions for all those who are members 
of the Union. Its administration is entrusted to a committee, but the 
important rules and regulations are made by the Union in the regular 
way—a nine-tenths vote being necessary to establish new regulations 
or modify old ones. All members must observe the tariff of rates 
established by the Union. 

The actual work of making individual rates is performed by local 
boards and inspection bureaus. For Illinois, the Illinois Inspection 
Bureau operating under the supervision of the Western Actuarial 
Bureau and subject to the control of the Western Union has charge 
of the Dean Schedule and keeps it up to date. A rating book is pub- 
lished for each of the cities and villages, and the agents representing 
the companies belonging to the Union are required to observe the rates 
as published. 

The Western Insurance Bureau: Until about four years ago 
there were a considerable number of companies that for various rea- 
sons did not belong to the Union. Such companies, called ‘‘Non- 


®Hess. The Philosophy and Method o@f Operation of the Analytic System, Chi- 
cago, 1909. 


FIRE INSURANCE RATES 1011 


Board Companies,” generally followed closely the Dean Schedule of 
rates, but in many cases were paying their agents a higher rate of © 
commission. In June, 1910, a large portion of the non-board com- 
panies organized the Western Insurance Bureau and established a 
uniform rate of commission, varying from fifteen to twenty-five per 
cent., except in certain preferred risks where the commission is as 
high as forty per cent. 

In April, 1912, the Union and Bureau entered into a combination 
for the purpose of establishing a uniform rate of commission for both 
organizations. While there is no agreement to that effect, the result 
of this combination has been to secure the adoption of a uniform rate 
of premiums for writing insurance by both organizations. 

At the present time competitive rate-making between stock fire 
insurance companies in fire insurance is, generally speaking, a thing 
of the past. Whatever competition exists is between the mutuals, the 
Lloyds, the inter-insurers and the companies comprising the Unions. 
Since the mutuals are by their nature, and to a certain extent by law, 
prevented from entering into competition in centers of population 
where there is danger of conflagrations, a considerable part of the fire 
insurance business is not subject to competitive conditions. 


STATE REGULATION OF INSURANCE 


While the companies have been establishing cooperative agencies 
for the purpose of making and enforcing non-competitive rates, the 
several states have been creating State Departments of Insurance and 
authorizing such departments to supervise the activities,of the com- 
panies and more and more.to regulate and control the rates promul- 
gated by the rate-making associations. 


In Illinots 


The State law under which the insurance business is conducted in 
Illinois has two principal objects: to prevent insolvent insurance com- 
panies, associations, etc., from undertaking risks, and to secure a 
revenue from the insurance business. 

The law covers these two objects in a satisfactory way. The 
Insurance Superintendent is given ample power and is provided with 
an office force sufficiently large to enforce the law fairly well. The 
Insurance Superintendent is, however, not directly authorized to exer- 
cise any supervision over either rates or rate-making associations. 

Attention should, however, be called to two clauses, one of which 
gives the Superintendent power to classify risks and the other to secure 
and publish information as to the actual rates in force. 

Section 21 (paragraphs 37, 38, 40) of Chapter II of the Insurance 
Laws (Edition of 1911) provides: 


It shall be the duty of the Insurance Superintendent to establish a classifi- 
cation of risks into any number of classes, not less than four, according to the 
degree of hazard of such risks; and the Insurance Superintendent shall require 
said companies, as a part of the aforementioned statement (the annual statement 
required by law) to give the number of policies in force covering property 
embraced in each class and the aggregate amount at risk upon property in 
each class. 

The Insurance Superintendent is hereby authorized and empowered to 
address any inquiries to any insurance company or the secretary thereof, 


1012 EFFICIENCY AND ECONOMY COMMITTEE. 


in relation to its doings or condition, or any other matter connected with its 
transactions, and it shall be the duty of the company so addressed to promptly 
reply in writing to such inquiries. 

It shall be the duty of the Superintendent of Insurance to cause to be 
prepared and furnished to each of the companies, printed forms of the state- 
ments required by this Act; and he may, from time to time, make such changes 
in the form of such statements as shall seem to him best adapted to elicit from 
the companies a true exhibit of their condition in respect to the several points 
hereinbefore mentioned. . 

It shall be the duty of the Insurance Superintendent to cause the informa- 
tion contained in the statements required by this section to be arranged in a 
tabular form and printed in his biennial report. 

It will be noticed that the Insurance Superintendent is to establish 
a classification of risks into any number of classes, not less than four, 
according to the degree of hazard; he is further authorized to inquire 
into the “doings” of all insurance companies ; he may change or modify 
the form adopted by the legislature whenever in his judgment such 
changes would better secure the desired information, and finally he is 
required to publish such information in his annual report. In view 
of the above provisions of the law it is evident that the Insurance 
Superintendent is not only empowered, but it is made his duty to 
secure full publicity of fire insurance rates, by establishing classes of 
risks and securing information in regard to the number of policies in 
each and the aggregate amount at risk upon property in each class. 
That such information would prove of the very greatest value hardly 
needs argument. It has all the merits of proper publicity. Its chief 
value would lie in its discouragement of discriminations in rates against 
certain classes of property. It is possible that such information would 
have little effect upon the general schedule of rates. It would, how- 
ever, facilitate a comparison of rates in Illinois with rates on similar 
classes of risks in other states, and thus tend toward an equalization of 
rates in general. 


In Other States 


Up to the present time sixteen states have enacted legislation 
providing for a greater or less supervision of fire insurance rates. 
These states in the order in which the legislation was enacted are 
as follows: 


New. Hampshire” cee oes 1899 Kentucky. 20.4 3.2005. 1912 
Montara. ? ee ne eee ead the Arkansas 0.00.6 5 as 3 a 1912 
SouthvG@arntinall er. eine ea. ee 1904 New: Jersey 2.00.0... cee 1912 
Oklahnmatcc bit. Gain eee: 1907 North Garolisa: <,:. 1... lee 
Kidsrsagir' ic. 4 Satie Sue a ees 1 Oo New: Yotk? eas onsale eee 1913 
Louisiana (Repealed 1912).... 1910 "TOXASy vgn’: von [a Bie tl Sele dele Reena 
Massachusetts 007.54 ht ete le Washington 2.0. s,s <i. ake eee 
Missouri (Repealed 1913)..... 1911 West: Virpintg’>.'... ys 1913 


In the fourteen states where state regulation of rates is now in 
force the power of the State through the courts or Department of 
Insurance varies very greatly. Some merely prohibit discriminations ; 
some require all rates and schedules to be filed and made public rec- 
ords; some authorize certain authorities to hear complaints; some 
authorize the insurance department to change rates on complaint after 
an investigation; and one provides that the rates and schedules shall 
be made by a state commission. 


FIRE INSURANCE RATES 1013 


Anti-Discrimination 


Montana in 1903 enacted an anti-discrimination law, which pro- 
vides: (Chapter 112, Laws of 1903)—“No insurance company organ- 
ized under the laws of this state, or doing business in this state shall 
make or permit any discrimination or distinction in favor of individ- 
uals between insurants or property of the same class in the amounts of 
premiums or rates charged for policies or in the dividends or other 
benefits payable thereon.”’ Agents violating this provision are made 
guilty of a misdemeanor. Companies and officers are liable to a fine 
of not exceeding $500 for each violation, to be recovered by an 
action in the name of the state. Further, the State Auditor is required 
to revoke the license for one year of any company found guilty of 
disobeying the law. 

Oklahoma has a similar provision in the anti-trust law, and the 
State Insurance Commissioner has ruled that the section applies to 
fire insurance corporations. 


Rates To Be Filed 


Fight states, viz., Kansas, Kentucky, Arkansas, New Jersey, New 
York, North Carolina, Washington and West Virginia, require rates 
and schedules to be filed and, generally speaking, to be open to public 
inspection. 


Hearing Complaints 


Massachusetts and New Hampshire provide that any person or 
company aggrieved by any rating of any insurance company may file 
a complaint with the insurance commissioner. In Massachusetts the 
complaint is heard by a board composed of the Insurance Commis- 
sioner or a special deputy appointed by the commissioner and two citi- 
zens appointed by the Governor, sitting as a board of appeal for fire 
insurance rates. After due hearing the board is authorized to make 
a finding “as to whether the rate is excessive, unfair or discriminatory, 
and shall make a recommendation.” ‘The finding and recommendation 
in each case is a public record, open to inspection, but is not obligatory 
upon the companies. In New Hampshire the commissioner is author- - 
ized to conduct the hearing and if the rates appear to him to be exces- 
sive, he may fix a reasonable rate, which must be adhered to by the 
companies. Refusal to insure property at the rate fixed by the com- 
missioner after a hearing is punishable by a fine of $200 for each 
offense. 


Rate-Making Associations Authorized 


The latest development in state legislation concerning fire insur- 
ance is connected with the authorization and regulation of rate-making 
associations. This movement seems to have originated in Missouri in 
1911. Under the Missouri Act the companies operating in that state 
formed the Missouri Actuarial Bureau and employed a force of expert 
raters and the necessary clerical help, under the general direction of 
Mr. H. M. Hess, one of the leading authorities on the Dean Schedule. 
Before the work of this Bureau was completed, the legislature of 
1913 passed additional legislation making it illegal for any company to 
use any rates prepared by any rating association. While the former 


1014 EFFICIENCY AND ECONOMY COMMITTEE. 


legislation was thus negatived and the work of the Actuarial Bureau 
rendered useless for the time, the idea was adopted in New Jersey, 
New York, North Carolina and Washington and seems likely to spread 
over a wide territory in the immediate future. 

The New York legislation is the most comprehensive and there- 
fore its principal features will be described as an illustration of this 
type of regulation. The New York Act provides that every corpora- 
tion, association, bureau or person that maintains a bureau or offices 
for suggesting, approving or making rates to be issued by more than 
one underwriter for insurance on property or risks in the state must: 
(1) file with the Superintendent of Insurance a copy of the articles of 
agreement, etc., and such other information in regard to its organiza- 
tion as may be required by the Superintendent; and (2) submit to 
examinations by the Superintendent of Insurance as often as he deems 
expedient, and in any case at least once in every three years. The Super- 
intendent is required to make public the results of such examinations in 
his annual reports and to report to the legislature on the methods of 
operation of such organizations. The records of such organizations 
are made public records and the companies or bureaus are required to 
furnish the Superintendent any schedule of rates or other information 
that he may demand. Such bureaus may not discriminate between 
members nor may they make rates conditioned upon the whole or any 
part being placed at such rates or with subscribers to the rating 
organization. 

This legislation is the most important step in the right direction 
that has been taken in recent years in the supervision of insurance 
rates. The making of scientific rates cannot be undertaken by indi- 
vidual companies on account of the enormous expense. It must, there- 
fore, be done either by the companies through cooperating rating 
bureaus or by the states. From the scientific point of view the rates 
should be made by experts and the expense should be borne by the 
companies that are profiting by the business. Cooperation in making 
insurance rates, however, prevents competition between the companies 
and, therefore, such rates naturally become monopolistic in their char- 
acter. Consequently such rates should be under the supervision of 
some public authority. This condition has been recognized in the 
New York legislation and the proper supervision of such rates pro- 
vided for in the law. 


State Fire Insurance Rate-Making 


On the sixth of September, 1910, the State of Texas enacted the 
first general State Fire Insurance Rating law within the limits of the 
United States. Under this act a general schedule of rates based upon 
the Mercantile System was promulgated. In 1913 the Act of 1910 
was repealed, and a new act along the same general lines, but giving 
the state board more complete control, was substituted in its place. 

The Act of 1913 provides: 3 


(1) For a State Insurance Commission composed of the Com- 
missioner of Insurance and Banking and two commissioners to be 
appointed by the Governor by and with the advice and consent of 
the Senate; 


FIRE INSURANCE RATES ra POLES 


(2) The State Insurance Commission shall exclusively fix and 
promulgate maximum rates of fire insurance premiums to be charged 
and collected in the State. Companies writing insurance in the state 
are not permitted to charge rates higher than the rates promulgated 
in the schedule, nor to charge less in any case unless they make such 


lesser rate applicable to all risks of the same class situated in the same 
community. 


Under the authority of this act and its predecessor, the State 
Insurance Commission was created and organized in Texas in 1910 
and promulgated its first schedule of rates on Puly Loy OTS 4 Lbs 
Texas Basic Schedule, in accordance with the principles of the Mer- 
cantile Schedule: 


; Defines a standard city and provides by a system of charges and credits 
or deviations therefrom. The application of the charges and. credits gives the 
key-rate for a town; 

Makes a classification of buildings based upon the character of the con- 
struction and defines a standard building in each class, with a series of charges 
and credits for deviation from the standard ; 

Provides an occupancy table for various commodities ; 

Makes specifications of charges and credits for various kinds of expo- 
sure; and 

Describes a large number of special hazards with the appropriate rates for 
the same. 

‘The Board schedules are contained in a book of 354 pages and 
are supplemented from time to time with amendments. Changes in 
any of the foregoing provisions are modified by order of the com- 
mission. 


RATES IN ILLINOIS 


In a paper read before the National Convention of Insurance 
Commissioners, held at Burlington, Vermont, in July, 1913, the Hon. 
F. W. Potter, then Insurance Superintendent of Illinois, stated® that 
he had called upon the stock fire insurance companies doing business 
in the State of Illinois, Kansas and Texas, for a statement of their 
fire premiums, fire losses and expenses for a five-year period ending 
December 31, 1912. 

During this period there was no supervision exercised over 
rates in Illinois. In Texas the State Rating Board had been in exist- 
ence for about two years; and in Kansas, the State Insurance Super- 
intendent had been exercising authority over rates for a period of 
four years. ! 

The results of this inquiry, according to Mr. Potter, showed that 
ninety-seven companies doing business in Texas had suffered an under- 
writing loss of $3,435,745 and of approximately $500,000 in the State 
of Kansas. Mr. Potter planned, he stated, to communicate the results 
to the State Legislature, with a recommendation that the state law be 
amended in such a way as to clothe the State Superintendent of Insur- 
ance “with sufficient discretion to refuse a license to companies desir- 
ing to do business in Illinois, and admitted to these unprofitable states, 
where by the terms of the law or its necessary effect, the rate-making 
function is taken away from the insurance companies.” 


*Proceedings National Convention of Insurance Commissioners, 1913, p. 57. 


1016 EFFICIENCY AND ECONOMY COMMITTEE. 


Instead of carrying out his original intention, Mr. Potter pre- 
sented the matter to the National Convention of Insurance Commis- 
sioners, chiefly on the ground that it was a matter concerning all the. 
State Insurance Departments and ought, therefore, to be first dis- 
cussed by that body. The paper of Mr. Potter was extensively dis- 
cussed, but no action was then taken. Later a Committee on Rates 
was appointed and the Honorable Herman L. Ekern, Commissioner 
of Insurance of Wisconsin, was made Chairman. This Committee has 
been carrying on an investigation, but has not yet published its report.?° 
Mr. Potter very properly contends that no State should, by act of 
legislation, attempt to get its fire insurance at less than its share of the 
total cost for the country as a whole, and that where a state persists 
in so doing it may become desirable for the other states to take 
concerted action to remedy the situation. 

His first proposal, that of excluding companies doing business in 
a losing state from transacting business in a profitable state, has so 
many disadvantages that it cannot be seriously considered until other 
methods have been tried. The tendency at the present time is to per- 
mit companies to join together for purposes of making scientific sched- 
ules and specific rates and give the insurance department the power to 
prevent discriminations between individual risks within the same class. . 
If after such regulation has been in operation for a period sufficient 
to give it a thorough test, rates as a whole are unduly high, then it 
may become both wise and necessary to clothe the state departments 
with the power to raise or lower general schedules as in Kentucky and 
Kansas. 

The statement of Mr. Potter was intended to prove that the busi- 
ness of insuring property risks is more profitable in some states than 
in Others in certain years. The tables published by the various insur- 
ance departments show, however, that while certain companies con- 
duct business at a loss in certain states during certain years, the com- 
bined business is usually fairly profitable, especially for the larger and 
better established companies. 

To find whether the insurance is unduly profitable it becomes 
necessary to compare the net savings with the capital invested and at 
a risk. The New York Report'? made an investigation of the actual 
earnings on capital for—, 


Class 1. The six largest U. S. companies 
Class 2. The six medium U. S. companies 
Class 3. The six smallest U. S. companies 
Class 4. Six new companies. 

Class 5. Six foreign companies. 


The results were as follows: 


Per cent. 
Class.1-—20 wears 4.6 scsi cwr't Average rate of earnings 10.1 
Class. 2-20 years yc jcbisse hb eielobiblccmate spe tte ae 6.6 


19At the annual convention of the Insurance Commissioners held at Asheville, 
N. C., Sept. 15-18, 1914, the special committee on fire insurance rates and rate-making 
reported progress, and asked that the report be deferred until the December meeting. 
At the December meeting, a preliminary report was presented with a statement that 
the full report would be presented and distributed at an early date. 

11Report of the Joint Committee, 1911, page 55 et seq.— 


FIRE INSURANCE RATES £017 


Ee a a oa UE = Ai INE a er a ip te 4.5 

, aso OL ANY Ly os icc ees e eitlea uae tie se 28.5 
SEC ARL VE: Masten estat aiccs Meets Sie ch io Ale — 2.3 
SOMIpan ye Cen ks ok Fa pes alah apie | 

RAR (OaN ee ETS © etna cathe a aarsPRe ute) Cape ean alee — 2.6 

ME UTOIAT Wr ie Rh ne ete gM ey Merk ae ke 8.7 

RRGHDatly velar mese cere ec tan ae hi Ne Blog = EG 

BN eSP OW OINDAN Lie ei acini hiner) multi uddls os 

CZ OTA PIAN) Voge Etta Gaia eer, Peat Mt eae eu lt — 4,7 

AOUUIIAN VS ere ys Wicd ceekcda ek IA, Pi seet ia el tie 6.7 

DOM Dan virciee kr nace teat Cir lt Aah hy : 5.1 

CREAT T Gaye CIT ED AR be eens eet er Fe — ll 

WOULD AN: ime, Ce Mens VPS, Space. —14.8 


(— indicates a loss.) 

Attention may be called at this point to the expense ratio. The 
New York Report shows” that for every dollar received in premium 
38% cents is paid out for expenses, and that of this amount 21.5 cents 
is paid to agents in the form of commissions. While it is not within 
the scope of this report to investigate the proper expense ratio for an 
insurance company, it may be pointed out that the fire insurance busi- 
ness as conducted at the present time does not necessitate an extensive 
system of salesmen and solicitors as is the case with life insurance; 
nevertheless the ratio of expense to premiums is much higher in the 
case of life insurance business. 

The question of especial interest to the citizens of this State is: 
Are the rates relatively higher in Illinois than in the United States 
as a whole or in other states similarly situated and with approxi- 
mately the same hazards? This question is not easy of solution with 
the information available under present conditions. A comparison of 
rates—that is, the premium paid per $100 worth of property insured— 
is obviously of little or no value in this connection. It is well known 
that fire insurance rates in European countries are exceedingly low 
when compared with those in force in the United States. This condi- 
tion is due chiefly. to the comparatively small fire loss in European 
countries. This small fire loss again is due chiefly to two causes: 


Building Construction and Fire Protection 

Frame construction is almost unknown in European cities.1* In 
the United States it is the rule, except in restricted areas in certain 
of the cities. Fire protection in many of the cities in the United 
States is comparable with that afforded in Europe. But in other cities 
the protection afforded is entirely inadequate considering the risks 
involved; as a result, the conflagration hazard, as well as the annual 
fire loss, is small in European cities and relatively large in the United 
States. 
The Moral Hazard 


The moral hazard is the title given to all classes of hazards that 
arise out of circumstances which make it possible for persons to profit 
from the burning of insured property. For example, wherever there 


12Page 91. 
18), S. Geological Survey, Bul. 418, pp. 16-21. 


1018 EFFICIENCY AND ECONOMY COMMITTEE. 


is an opportunity to recover from the insurance companies compensa- 
tion in excess of the value of the property burned a moral hazard 
emerges. For this reason the valued policy is universally opposed by 
insurance companies as tending to create an artificial and unnecessary 
moral hazard. For this reason also the coinsurance principle with 
the usual eighty per cent. clause is generally favored. In this connec- 
tion it may be noted that the valued policy is unknown in Europe, and 
the coinsurance principle is practically a universal one. On this 
account the fire losses due to the moral hazard are less in Europe than 
in the United States. 

There is still another factor of large importance. It is well 
known that every building situated within a few hundred feet | 
from a burning building is under considerable risk from the so- 
called exposure hazard. The exposure; hazard - varies with the 
inflammability of the building and contents, the distance from the burn- 
ing building, the direction and velocity of the wind, and the fire pro- 
tection afforded by the fire department. It is of course true that the 
exposure hazard is independent of the original cause of the fire. The 
incendiary who. burns his own building for the sake of the insurance | 
may involve a city in an extreme conflagration. The man who care- 
lessly drops a lighted cigarette butt in a lot of inflamable material, as 
in the case of the Asch building in New York on the 24th of March, 
1911, when 143 working girls lost their lives, is equally as dangerous 
and ought to be legally responsible. The European countries have rec- 
ognized this danger and have attempted by appropriate legislation to 
lessen the hazards arising therefrom. This result is partially accom- 
plished by laws making every individual responsible for loss of life 
or property caused by his own gross carelessness and neglect. As a 
result of the less inflammable buildings, more adequate fire protection, 
and the reduction of the moral hazards by appropriate legislation, the 
fire loss in European countries is relatively small and the rates for fire 
insurance correspondingly low. 

The following table, compiled by the Geological Survey and the 
Bureau of Manufactures, shows the fire loss per capita for cities of 
the same size in the United States and Europe.** 


Po pulation. iS, Europe 
4D ver ViS0000G We tikes evan eR Ree 65 
100,000 300 O00 eae ae Site ee ee tone Le ter ha eer ae OF 
50,000 2100;000 (iD ee ee 47. 1.67 
30,000 9250, 00053 i ath ee S28 Pee eee eee a 
10,000 = 30/000 ii eas he iets pee 81 
Under — 10,000 . BA/i 


For certain cities of ADDLOxIMately the s same size, , the comparison 
s as follows :"® 


—e 


Loss per capita. . Loss per cari 
1 hParis) (1904) aoe eee oe ae 47... Chicago >(.1907). in. ee 1.43 
2. St. Petersburg (1904) ....... 1.42....Philadelphia (1907) . 1.45 
3. Birmingham, Eng. .(1904) .... .41...; Baltimore- (1907) 32.) (ape 1.66 
4... Shefheld,: Eng. (1904) >... 2° 318.4, Cleveland (1907). vat) ae 1.12 
5.) Frankfort, ‘Ger, (1904). 00.2. 31. 2.Gincinnatis (1907) 3,00. '.7 2: ae 5.70 
6. Bremen, Ger. (1904) ......... 38; 62)St./ Paul (C1907) o5 0. ee + 2.56 
7. Toulon, France (1904) ....... 55 Atlanta £1907) | oe eee 2.15 


14U. S. Geological Survey, Bul. 418, p. 24. 


15Tbid p. 24. 


FIRE INSURANCE RATES i LOLS 


The National Board of Fire Underwriters gathered statistics for 


1910, relating to a considerable number of cities, with the following 
results: 


Cities. Population. Loss per capita. 


Mentteds States oO sv 207 29,996,720 $ 2.39 
PAICIANG eee ener thy fe 11 2,335,847 44 
Berenice: tates evil | go 3! ed 8 4,392,529 92 
VOT IN ALI Ves yi Pe oes oad Pek 13 5,616,822 .99 
Brolandee ne: |; See ee oe to 2 657,680 45 
BROEIVA Vie oa, elegy te 1 244,000 [ao 


The average annual loss by fire in the United States for the past 
ten years has been approximately $225,000,000,'® or about $2.50 per 
capita. The average annual loss in the European countries during 
the same period is stated by Mr. Roger W. Babson’ to be less than 
fifty cents per capita, or approximately one-fifth that of the United 
States. No comparison of rates prevailing in United States with those 
prevailing in European countries is of practical importance unless 
taken in connection with fire losses. A comparison of rates to be of 
value must then take cognizance of conditions, and compare states and 
cities similarly situated with respect to the fire hazard, or failing that, to 
make corrections for the risk involved. While the conditions vary in 
the several states, it may prove of value to make some comparisons, 
carefully noting in connection with the rates, the relative hazards as 
shown by the annual fire losses. For this purpose the following states 
have been selected: Illinois, Iowa, Massachusetts, Michigan, New 
Jersey, New York, Texas and Wisconsin. To show rates and losses 
in an area chiefly urban composed largely of slow-burning or fire-proof 
construction, and protected by a well-equipped and efficient fire depart- 


_ ment, the District of Columbia is included. 


Table I shows for the selected states and the District of Columbia: 


1. The total insurance written (a) for each of the years from 
1909 to 1913, (b) for the five year period 1909-1913, and (c) for a 
period of approximately forty years—that is, from the first year for 
which the statistics were gathered to the year 1913 inclusive. 


Z. The total premiums received for the corresponding periods ; 
and— 


3. The total losses on account of fire for the same period. 
From this data the following rates have been calculated: 


(a) The average premium rate in dollars per hundred dollars 
insured ; 


(b) The average burning rate in cents per one hundred dollars 
insured. 
(c) The-ratio of losses to premiums, expressed as a percentage. 


16Tbid p. 138. 
17N, Y. Times, Mar. 24, 1912. 


1020 


Year Risks Premiums Losses b Rate 
1900 ........ $ 1,778,804,044 $ 22'160,892 $ 9,963,255 $1.24 
19LOf aie 1,853,261,576 22,589,580, 10,871,966 1.22 
LOTT es eek We, U lide Seas 24,396,372 12,244,0159 > eee 
19 Zire ere 2.102,364,885 25,369,047 12,867,136" “T21 
LOLS See ann. 2,268,882,603 26,011,348 14,277,051 1.14 
1909-13 ........ $10,020,692,811 $120,527,239 $ 60,223,423 $1.20 
1869-13 ........ $46,398,382,602 $547,704,869° $264,034,929° $1.15 
IOWA d 
L909 0 Wek tS 4s. Ae $ 8927f $ 2,501 f $1.83 
NHS GN ge eae a 540.7 7,464 3,186 1.38 
1693 Leama ty 585.2 7,479 4,026 1.27 
AS Pee Rey a Fe 480.4 5,549 3,240 1.16 
IWBAGs. Acre: 652.5 7,012 4,327 1.07 
OOO TBS rns ea eed AOSD $ 36.431 $17,280 $1.21 
1870-13: 2.0.2... $21,207.1 $175,266 $75,781 $1.66 
MASSACHUSETTS & 
LOUD ic ths IOS $ 12,905 $ 6,585 $. .99 
yA 6 ben, eae 1,354 13,085 7,014 .96 
DRPIOS ae. 1,391 13,457 FAT? 97 
TS 1,410 14:154 7,884 1.00 
1943) 4..: 1,479 14,534 9;191 .98 
1909-13 ........ 6,917 68,135 37,791. 98 
1872-13 4....... 39,065 397,960 206,351 1.01 
MICHIGAN? 
1909 $  679:7 $ 7,998 $4,218 $1.17 
19.10 © Ae eke: 872.25 8,203k 4,404 .93 
10,8781 
TOA Pee a 854.7 8,649 5,201 1.04 
1912 1,142.87 9,236k 4,998 Miz 
12,818/ 
AK ee Crores © 1,320.87 9;245k 5,037 1.01. 
13,359/ 
1909-130 ce) oe 4,870.2 53,702 23,888 m0 
1S7O-V50w) we on ee Opes: 196. 101. itz 


EFFICIENCY AND ECONOMY COMMITTEE. 


EABLE I 


ILLINOIS a °?°® 


























@Statistics from Ill., Ins. Reports, 1910-1914 














¢ Loss 
Ratio 


bIn Dollars per $100 at risk 

In Cents per $100 at risk 
adInsurance Age, October, 1914 
éIn Millions of Dollars in all tables except Illinois. 
YIn Thousands of Dollars in all tables except Illinois. 
Cedi and by States, 1914 - 

Boston fire not included. 


’ Ratio of 


Loss to 
Premiums 
55 40.4 
58 47.2 
60 50.2 
61 50.7 
62 54.8 
“60 49.9 
37 Tate 
51 28.8 
at 42.6 
64 53.8 
66 57.9 
65 61.7 

62 ee 
66 438 
51 51.2 
52 53.8 
52 52.9 
56 65.7 
62 63.4 
SAS 2 cies 
53 51.8 
59 58.7 
50 50.7 
58 61.3 
54 53.0 
54 60.3 

552. 55, 
64 51.9 


eee ee eee 


ae 
1910 .... 


1911 
1911 


© 6 ef 0s Je 10.6 


S56 8 6 © 6 0.8 


NEG Sapa 


(7 SS eae 


1909 
1910 


eee ee wee 


eee ere eee 


BE atv, os. 2 ate 
A 
J! 


(LS 1 ar 


1865-13 


6 0/8) 0) 8. oo) 6. 


ae ae 
> Se ee 


M22) i ar 


tReport Insurance 


6) fe) 6.8) 6.6 @ 


ce @ 66's 258 





























Commissioner, 1910-1914 


jGross Amount at risk 
kNet Premiums _ 
lGross Premiums 
mStatistics from Insurance Age, Oct. 1914, unless otherwise noted. 


nAverage of yearly average burning ratio 


Premiums 


FIRE INSURANCE RATES 


Losses 


NEW JERSEY m 















































$ 10,000  — $ 3,500 
10,000 4,750 
10,700 4,330 
11,300 6,250 
11,500 6,000 
53,500 24,830 

184,000 90,000 
NEW YORK 

$ 43,500 $19,750 
45,500 21,000 
44,000 25,750 
46,750 26,000 
48,000 23,000 

227,750 ‘115,500 

1,102,000 567,750 

TEXAS 

$ 8750  — $ 6,500 
8,750 6,000 
8,750 6,000 
9,500 8,250 
10,000 5,500 
45,750 32,250 

159,250 99,500 
TEXAS 0 

$ 9,840 $8,450 
10,000 5,200 
19,840 13,650 

WISCONSIN 

$ 7,000  — $ 3,000 
6,750 3,750 
6,750 3,333 
7,250 2,750 
8,000 2,500 
35,750 15,333 

187,500 93,000 


oTexas Ins. Board—Combined Classification totals. 


Loss 
Ratio 


1021 


Ratio of 
‘Losses to 
‘Premiums 


1022 EFFICIENCY AND ECONOMY COMMITTEE. 


DISTRICT OF COLUMBIA 











109 «sig ode $ 133 $ 670 $ 200 
{O10) CAR Nbaeelyas 670 250 
101TH RE 18S 650 440 
1012.) San: 130 630 300 
isn eee 142 710 290 
{00013 Aare 678 3,330 1,580 
lcs ccna a Gaina: 15,000 5,890 











¢ 50 15 
48 18 
7 32 
48 30 
49 20 

$ 49 23 

$ 59 23 


In order to show more clearly the fire insurance rate situation in 
Illinois, three tables have been prepared from the information con- 
tained in Table I. These tables are: Table IJ, which shows the burn- 
rate for each of the geographical areas, and the relative position occu- 
pied by Illinois in the group. Table III, which shows the premium 
rate in each area, and Table IV, which shows the profits to the com- 
panies derived from the insurance written in each of the areas. 


TABLE II 


CENTS BURNED PER $100 INSURED 


31 
42 
53 
57 
64 
65 
66 


96 
63° 


1913 1909-1913 Period Approx. 40 yrs. 
1. Dist. Col. 20 1. Dist. Col. 23.2. 1s. Dist) Gor 23 
2. Wisconsin 30 2. New York 35.7. 2. New York 
3. New York 32 3. New Jersey 42 3. New Jersey 
4. New Jersey 41 4. Wisconsin 46 4. Massachusetts 
5. Michigan 54 5. Massachusetts 548 5. Illinois 
6. Massachusetts 62 6. Michigan 55 6. Michigan 
7. Illinois 62.9 ~- 7. Illinois 60 7. Wisconsin 
8. Iowa 65 8. Iowa 62 8. Iowa 
9. Texas 73 9. Texas 96 9. Texas 

The United States, 1890-1907.a 
TABLE III 
CENTS PAID PER $100 INSURED 

1913 1909-1913 Period Approx. 40 yrs. 
1. oper Col. 49 1. Dist. Col. 49 1. Dist. Col. 
2. New York 67 2. New York 77 2. New York 
3. New Jersey 90 3. New Jersey 91 3. New Jersey 
4. Massachusetts 98 4. Massachusetts 98.7. 4. Massachusetts 
5. Wisconsin 98 5. Wisconsin 107 5. Illinois 
6. Michigan 101 6. Michigan > 110 6. Michigan 
7. Illinois II4 7. Illinois 120 7. Wisconsin 
8. Texas 130 8. Iowa 133 8. Texas 
9. Iowa 174 9. Texas 137 9. Iowa 

The United States, 1890-1907, a 
TABLE IV. 
CENTS SAVED PER $100 RECEIVED 
40 year Period 

1913 1909-1913 (Approx. ) 
1. Wisconsin 66.9 1. New Jersey 1. Dist. Col. 
2. Dist. Col. 59 2..lowa 532s. Lowe 
3. New York 51.8 3. Wisconsin . po} 3. Illinois 
4. New Jersey 48.4 4. Dist. Col. 52.6 4. Wisconsin 
5. Illinots 45.2 5. Illinois 50.1. 5. New York . 
6. Texas 443 6. New York 49.2 6. Massachusetts 
7. Michigan 39.7. 7. Michigan 45 7. Michigan 
8. Iowa 38.3 8. Massachusetts 44.77 8. New Jersey 
9. Massachusetts 36.7°, 9. Texas 30 9. Texas 


The United States 1890-1907.a 


KobhhRRU mH 
& GSURSSSE SS 
DO OO NUR OON 


aHess, H. M. Philosophy and Method of Operation of the Analytic System, p. 15. — 


: _ FIRE INSURANCE RATES eLO2S 


From an examination of Tables II, III and IV it will be noted: 


1. For the forty-five years during which the insurance statistics 
have been gathered in the state, 57 cents worth of property has 
been burned and paid for by the insurance companies for every $100 
insured. That. for the last five years 60 cents worth has been 
burned and paid for; and that for 1913 the burning ratio was 62.9 cents 
per $100. This showing is better than the average for the United 
States, 1890-1907, but compares unfavorably with the fire loss in the 
District of Columbia, New York, New Jersey and Massachusetts, for 
the total period, and with District of Columbia, New York, New Jer- 
sey, Wisconsin, Michigan and Massachusetts for the past five years. 
From these tables it would seem that the fire loss-in the state is 
unnecessarily high and steps should be taken to ascertain the causes 
and apply the proper remedy or remedies. 


2. The average rate paid for insurance for the 45-year period 
is $1.15 per $100 insured. It will be noticed that Illinois occupies a 
middle position in the selected group, and the same relative posiffon in 
rates that it does in the fire loss. While, however, the fire loss is on 
the average a little below that of the United States, the average rate 
is somewhat higher. In the face of a steadily increasing fire loss, it is 
of course unlikely that the premium rate will fall by voluntary action 
of the companies writing the insurance. While other states have been 
gradually reducing their fire loss, or burning ratio, and as‘a result 
their average premium rate, Illinois shows an increasing burning rate, 
and a stationary premium rate. For the last five yeays and for the 
year 1913, in both burning ratio and premium rate, Illinois has dropped 
to seventh place, only Iowa and Texas showing a more unfavorable 
condition. en 


~ 


3. Table IV shows the proportion of the premiums received 
which have been retained by the companies. It may be desirable to 
note in this connection that out of the premiums received the insurance 
companies pay——first, the fire losses, and, second, the expenses of carry- 
ing on the business. Whatever is left after paying the fire losses and 
expenses goes to the proprietors of stock companies in the form of 
increased surplus and dividends, and to policy holders of mutual com- ~ 
panies as surplus or in return premiums, often erroneously called divi- 
dends. For the whole United States, during the period 1887-1907, for 
every dollar paid into the insurance companies, 56 cents was burned 
and 44 cents was retained by the companies. The 44 cents was used 
to pay expenses, accumulated a “safety fund” and the remainder was 
paid out in dividends. According to the report of the Joint Committee 
of the Senate and Assembly of the State of New York,’® published 
in 1911, the 44 cents was divided up as follows: 


Page 91. 


1024 EFFICIENCY AND ECONOMY COMMITTEE. 


Salaries, rent and general administration ........ 7.5 cents 


Commissions to agents ..... yo bl b ale'e oe 4.903 0 nr 
Famesiti< pe bea otha. Se rs a sai irvtas » 6 olbcade SORE a 
Special agents—salaries and expense .......... 2 » Sale 
Inspections—local boards .............. .. lk pel 
Printing—postage). «+ ..4. dur jeedi oe ee ee 
sb otalPexperrseii...icicuat seein on . bo 2 a ae oe a 

Totaly burning 37) .).0. & soaks ee 56.0507 5 

04 SDs 

Net-underwriting profitcrse. co. n een . wig SOLO 


—_———_—— 


This net profit is, it should be observed, a net saving out of every 
dollar received in premiums. To find the rate of profit on the capital 
invested, it is necessary to compare the total net annual savings with 
the capital invested. 

For the forty-five year period the rates enforced by the fire insur- 
ance companies in Illinois, uncontrolled by the State, show a saving 
from the premiums received considerably above the average for the 
United States for the shorter period 1890-1907. And in only two of 


the selected areas, viz., District of Columbia and Iowa, have the insur- 


ance companies been saving a larger proportion of the premiums 
received. For the five-year period, as well as for the year 1913, Illinois 
occupies the middle position, four areas being more profitable to the 
insurance companies and four less so. In general, the State of Illinois 
has been tending to become a less favorable field for insurance com- 
panies, not because of a decrease in the premium rate, but owing to 
a steady and persistent increase in the fire losses. This is a serious 
situation and merits the attention of all property owners, fire insur- 
ance companies, the state legislature and the state officials, especially 
the Department of Insurance and the State Fire Marshal’s office.*® 


COINSURANCE 


Coinsurance is best defined by a quotation from the old French 
clause relating to that feature of insurance. It states that: 

If at the time of the fire the value of the objects covered by the policy 
is found to exceed the sum total of the insurance, the assured is considered 
as having remained his own insurer for that excess, and he is to bear, in that 
character, his proportion of the loss. 


1°The writer desires in this connection to call attention to the exceedingly un- 
satisfactory condition of fire insurance statistics in) the various States and to suggest 
that the State Superintendent of Insurance be urged to use his influence with the 
State Commissioners at their next general convention in favor of securing uniformity 
in the reports of the insurance companies in the several States and especially in the 
method of compiling the results in each State for the summaries generally presented. 
Owing to the lack of uniform methods among the several States, to say nothing of 
the variations that are often found from year to year in the same State, the writer 
has little confidence in the tables he has compiled, except as showing tendencies and 
positions of the several States in a most general way. A specific example may be 
cited to illustrate: The State of Michigan usually presents statistics showing the net 
amount at risk written each year. For the years 1910, 1912, 1913, the gross amounts 
only are reported. Wor the years 1909 and 1911 the net amounts only are given. 
This makes it impossible to obtain the burning ratio, and the premium rate obtained 
by comparing the gross amounts written with the gross premiums is not likely to 
be identical with that found by comparing the net amount of risks with the net 
premiums received. By the concerted action of the State Insurance Commissioners, 
it would be comparatively easy to provide for uniformity in the reports of Insurance 
Companies and consequently of securing statistics that would be of value for com- 
parative purposes, 


. 


. 


- FIRE INSURANCE RATES * 1025 


The European countries generally have written insurance from 
the earliest times under the coinsurance principle. The practice in the 
United States, on the contrary generally follows the opposite practice, 
and in some of the states coinsurance is prohibited by law. The effect 
of coinsurance is to make the owner a coinsurer with the insurance 
_ company, wherever the property is only partially insured. When, how- 

ever, the property is fully covered, the entire risk is undertaken by 
the company whether the loss is partial or complete. Thus, suppose 
A insures his property worth $10,000 for $5,000 and the policy contains 
the coinsurance clause. If the loss is total A recovers $5,000, the 
face of the policy. If, however, the loss is only $500 the company 
is responsible for that proportion of the actual loss denoted by the 
relation of the face of the policy to the value of the property. In this 
case the company is responsible for one-half the loss, or $250. If 
the policy does not contain the coinsurance clause the company is 
responsible for the total loss up to $5,000. The coinsurance clause 
is, therefore, of importance only where the loss is partial; but most 
losses are partial. The New York Report has an interesting com- 
pilation bearing upon this subject. For a certain class of buildings, 
for-every $100 worth of property insured, 


On the average, out of every 100 fires— 
82 average $2 loss, or a total of $164 
6é 66 66 666 cc ‘ce 84 


6 14 
3 66 25 ce oe 23 66 (73 es 
2 66 35 ‘6 66 66 66 66 70 
1 66 45 6é CG) 6e 66 66 45 
1 66 55 66 6c OSG 66 6c 55 
1 6c 65 66 6c 6 6é 66 65 
1 66 75 66 tC 166 66 66 75 
al 66 85 66 6c OS 66 66 85 
2 66 99 66 Seuree 66 6c 198 
100 A total of $916 


If all these houses had been insured for their full value—$100 
each—the loss to the companies would have been $916, or 9.16 per 
cent. of the face value of all the policies issued. If, on the other 
hand, each one had been insured for $10 the total amount at risk 
would have been 10 times $100, or $1,000, and the losses to the insur- 
ance companies would have been: 

82 losses at $2 equals $164 
Lae geese .1 Dic cath 180 


$344 
or 34.4 per cent. of the amount at risk. 

That is, without coinsurance the rate should be a degressive one, 
increasing as the amount carried on any property decreases. The rate 
of degression, worked out on the basis of actual experience, is, accord- 
ing to the New York investigation, as follows :?° : 


20Report of Joint Committee, Feb. 1, 1911, p. 85. 


1026 EFFICIENCY AND ECONOMY COMMITTEE. 


Insurance 10% of value Rate — 34% 
20 hee 46 . 66 24 OG 

30 cé 6é 6¢ é cé 20 ce 

4O 6é (73 6¢ ce (77 17 c¢ 

50 é c¢ c¢ 6é ce 15 ce 

60 ¢é &¢ €¢ 6s ce 13 ce 

70 cé 6¢ (f4 ce igs TZ cé 

80 cé €¢ €é ce ceé 1} ce 

QQ ‘6 ce 6é ¢é cé 10 6é 

100 (<9 ce t¢ 6é ¢é¢ 9 ce 


In other words, in order to get an equitable adjustment of the 
burdens of the cost of insurance, the rate should be based upon the 
two following principles: 


1. It should vary with the hazards of each building insured ; 


2. It should also vary with the amount of insurance carried, 
unless the coinsurance principle is adopted. 


In Illinois as a general principle the coinsurance clause is not in 
use, neither is there any provision for a degressive rate varying with 
the amount of insurance carried. The result is to favor the wealthy 
man and the larger corporations. Both of the latter can afford to 
take’a certain share of the risk themselves. The poor man and the 
smaller business cannot afford to take such risks. Consequently the 
first two classes insure less fully and are in most cases—that is, in 82 
out of every hundred—amply protected, and, carrying less insurance, 
their expense on account of fire protection is smaller. The last two 
classes ought to, and probably do, carry fuller protection and, paying 
the average rate, their expense for protection against the fire hazard 
is necessarily heavier. 

The coinsurance system ought to be provided for by legislation, 
but since there seems to be an unwarranted prejudice against this 
equitable principle, the companies should be required to make their 
rates degressive, increasing as the face of the policy decreases, the 
rate of degression to be determined on the basis of actual experience 
of the state in regard to partial and total losses. It may be noted in 
connection with coinsurance that it is the normal method in European 
countries and it is probable that this condition partially accounts for 
the greater attention to fire protection, the lowed burning ratio and 
the reduced cost of insurance. 


SUMMARY AND CONCLUSIONS 


Fire insurance and insurance covering property risks generally is 
a business that requires cooperative action for rate-making purposes 
on the part of the companies undertaking to carry the various hazards 
and properly to protect the property owners. Otherwise the rates are 
unstable and discriminatory, and changes in rates and discriminations 
are likely to handicap unduly the small property owner and favor those 
who are better able to protect themselves. 

Moreover cooperation in rate-making is a very great economy, 
since one “book of estimates,” as the rate schedules are often called, 
_may be used by all the companies. Indeed it is practically impossible 
for the small companies to undertake to enter the business of writing 


FIRE INSURANCE RATES 1027 


- 


insurance where they are obliged to prepare their own rate books. But 
rate-making by cooperative action permits and encourages monopolis- 
tic rates. This is especially true of commercial districts, where mutual 
companies generally find it undesirable to operate. On this account 
cooperative agencies should be recognized by law and required to 
_ Operate under the supervision of the State Insurance Superintendent. 

The primary object of schedule rating is to adjust the premium 
to the risk. Where this is scientifically done there is no discrimination 
in rates. Each property owner pays the average rate for his class of 
property risks. The law, therefore, should assist the cooperative rating 
agencies by prohibiting discriminations and authorizing the Insurance 
Superintendent to make investigations and order changes wherever it 
is found that discriminations actually exist. Whether the State Insur- 
ance Superintendent should be given the power to raise or lower rate 
schedules as a whole is as yet a controverted question. The Kansas 
law, enacted in 1909, has recently been sustained by the Supreme 
Court,”* and such power may, therefore, be legally granted. 

It may, therefore, be concluded: 


First: The average rate paid for fire insurance in the State of 
Illinois is higher than in the United States as a whole and higher 
than in some states even where the fire loss has been relatively greater. 


Second: The burning rate in Illinois, while higher than it ought 
to be, has been lower than in the United States as a whole and lower 
than in some of the states where building construction is of the same 
general character. 


Third: Rates have been made in Illinois for many years by 


cooperative associations without any supervision by the Insurance 
Department. | 


Fourth: Rate-making by cooperative associations of companies 
writing insurance in a given state is not only desirable, but necessary 
for the economical making of rates; and such rate-making is essential 
for equity as between individual risks or between similar classes of 
risks, unless the rate-making function is delegated to the Department 
of Insurance, as in Texas. 


Fifth: Rate-making by the state through the Department of 
Insurance is as yet in the experimental stage. If the state should make 
rates for insurance companies it ought also to make rates for railroad 
corporations and all forms of public utilities. Regulation of rates 
rather than the making of rates seems to be the wiser course at the 
present time. 


Sixth: Rate-making associations. are controlled by insurance 
companies. They should be required to report to the State Insurance 
Department and should be subject to regular examinations as insur- 
ance companies are. 

Seventh: Such associations by whatever name called should be 
prohibited from making discriminatory rates: 

(a) discriminating between risks of the same character in the 

State of Illinois; 


22German Alliance Insurance Co. vs. Ike Lewis, as Superintendent of Insurance for 
State of Kansas, April 20, 1914. 


1028 EFFICIENCY AND ECONOMY COMMITTEE. 


(b) discriminating between classes of the same general character 
in the State of Illinois; or 


(c) discriminating against Illinois risks, where compared with 
risks of the same general character in other states. 


Eighth: The State Department of Insurance should be clothed 
with sufficient power by an amendment to the insurance law to enforce 
effectively the above recommendations. 


Ninth: Since the department would be clothed with considerable 
discretionary power, it would probably be wise to put the general super- 
vision of rates under a commission, whose chairman should be the 
chief executive officer, or the Insurance Department should be united 
with the other regulating departments for purposes of control, retain- 
ing the Insurance Superintendent as executive officer. 


Tenth: Coinsurance should be permitted by law; and where 
policies are written without coinsurance the rates should be adjusted as 
explained in the section on coinsurance, so that persons protecting their 
property most fully would be required to pay the lowest rate, the rate 
progressing as the amount of the insurance carried grows less. In 
order to prevent the emergence of the moral hazard, as the amount at 
risk approaches the value of the property insured, the rate ought to 
be degressive until approximately eighty per cent. of the value of the 
property is covered, and after that point is reached the rate should 
become a fixed one, or increase in some geometric ratio as the face of 
the policy approaches the value of the property. 





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